Weekly Economic Update: December 3, 2024

Has the Santa Claus rally started?

The market continued to climb during the short trading week, with only an interruption on Wednesday after the Federal Reserve’s preferred inflation measure showed inflation is moving sideways.¹ This data sparked debate (again) about the pace and magnitude of future interest rate cuts, and Wall Street fretted that the Fed would have to slow down the pace of cuts in 2025.²

But when markets opened for an abbreviated session on Friday after taking Thursday off for Thanksgiving, worries from earlier in the week were forgotten and the S&P 500 hosted another new record high on Friday.³ The Dow broke 45,000 for the first time ever, then faded to end the day — but still ended the week with a new record at 44,911 as traders took some profits.⁴ The Nasdaq didn’t set a new record but has been floating above 19,000 for well over a week.⁵ With the way things are stacking up for December, it wouldn’t be a surprise to see the Nasdaq hit 20,000 by year-end.

Oil is trading below $70 per barrel as the heat is off in the Middle East, with Israel announcing a ceasefire with Hezbollah after 14 months of fighting.⁶ Can a ceasefire with Hamas be far behind? Tensions in the Middle East have been dialed back for the first time in a while and oil has stayed low, giving consumers lower gas prices just as holiday travel ramped up.⁷

Bitcoin keeps pushing closer to $100,000, and given the current mood of the market, it will crest that mark in the next week or two.⁸ Right now, the markets have momentum and all the signs of melting up — and it seems to be bordering on the irrational. It looks as if December will be a strong month as we close out 2024 and get ready for a new year. Enjoy the next month because, for now, the Santa Claus rally appears to be in full swing.

Fed minutes show some hesitancy toward rapid rate cuts

The most recent Fed minutes showed officials were not over-eager to ramp up the speed or magnitude of rate cuts.⁹ Markets are still expecting a quarter-point cut at the final Fed meeting Dec. 17-18, but the odds of a cut aren’t exactly a slam dunk, with chances currently standing around 65%.¹⁰

The most recent personal consumption expenditures (PCE) and Core PCE numbers, the Fed’s preferred measure of inflation, came in higher and seem to bolster the Fed’s position.¹¹ We’ve previously said that the final drop to 2% inflation will be the hardest to achieve, and now that the Fed has begun to cut rates, that hill is harder to climb.

With all the talk of potential tariffs adding to inflationary pressure, it’s hard to see how we reach a 2% inflation rate with what the Fed is doing right now. The tariffs may be targeted and opportunistic, but perception can often be just as powerful as reality, and as we watch the market climb upward on what appears to be thin air, things could just as easily move in the other direction. The Fed is once again beginning to look more and more like an observer and a reactionary rather than a leader in setting policy. But like everyone else, we’ll just have to wait and see what they do and how quickly they do it.

Coming This Week

• It’s back to work this week, with a full slate of data. The employment picture will take full stage starting on Tuesday with the Job Openings and Labor Turnover Survey (JOLTS) report, followed by the ADP employment report on Wednesday. We’ll see weekly unemployment claims on Thursday and finish the week with the latest Bureau of Labor Statistics (BLS) monthly employment situation (aka nonfarm payrolls) for November. Last month’s BLS number was terrible, so we need to see if that was an anomaly or the start of something new and ominous.
• Other data of note this week will include manufacturing PMI and construction on Monday; auto sales on Tuesday; MBA mortgage applications, services PMI, factory orders, the Fed Beige book and the U.S. trade deficit on Thursday; and consumer sentiment and credit on Friday.
• Third-quarter earnings are mostly done, with 95% of S&P 500 companies reporting as of Nov. 22. Earnings growth for the third quarter is 5.8%. For the current quarter, 58 S&P 500 companies have issued negative EPS guidance, and 33 companies have issued positive EPS guidance. Valuation is still rich for the S&P 500, with the forward 12-month price-to-earnings (P/E) ratio at 22.0 versus the 5-year average of 19.6 and 10-year average of 18.1.¹²

Sources:

¹ Josh Schafer. Yahoo! Finance. Nov. 27, 2024. “Key Fed inflation gauge shows PCE ‘going sideways.’” https://finance.yahoo.com/news/key-fed-inflation-gauge-shows-pce-going-sideways-154948194.html. Accessed Dec. 1, 2024.

² Josh Schafer. Yahoo! Finance. Nov. 29, 2024. “Wall Street sees ‘slower’ pace of Fed rate cuts in 2025.” https://finance.yahoo.com/news/wall-street-sees-slower-pace-of-fed-rate-cuts-in-2025-100030857.html. Accessed Dec. 1, 2024.

³ Yahoo! Finance. “S&P 500 (ˆGSPC).” https://finance.yahoo.com/quote/%5EGSPC/. Accessed Dec. 1, 2024.

⁴ Yahoo! Finance. “Dow Jones Industrial Average (ˆDJI).” https://finance.yahoo.com/quote/%5EDJI/. Accessed Dec. 1, 2024.

⁵ Yahoo! Finance. “NASDAQ Composite (ˆIXIC).” https://finance.yahoo.com/quote/%5EIXIC/. Accessed Dec. 1, 2024.

⁶ David Hodari. NBC News. Nov. 28, 2024. “As fragile Israel-Hezbollah ceasefire takes hold, what’s next for Gaza?” https://www.nbcnews.com/news/world/gaza-israel-hezbollah-ceasefire-hostages-rcna181973. Accessed Dec. 1, 2024.

⁷ Markets Insider. “Oil (WTI).” https://markets.businessinsider.com/commodities/oil-price?type=wti. Accessed Dec. 1, 2024.

⁸ Yahoo! Finance. “Bitcoin USD (BTC-USD).” https://finance.yahoo.com/quote/BTC-USD/history/. Accessed Dec. 1, 2024.

⁹ Federal Reserve. “Minutes of the Federal Open Market Committee, November 6-7, 2024.” https://www.federalreserve.gov/monetarypolicy/files/fomcminutes20241107.pdf. Accessed Dec. 1, 2024.

¹⁰ CME Group. “FedWatch.” https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html. Accessed Dec. 1, 2024.

¹¹ Bureau of Economic Analysis. Nov. 27, 2024. “Personal Income and Outlays, October 2024.” https://www.bea.gov/news/2024/personal-income-and-outlays-october-2024. Accessed Dec. 1, 2024.

¹² John Butters. FACTSET. Nov. 22, 2024. “Earnings Insight.” https://advantage.factset.com/hubfs/Website/Resources%20Section/Research%20Desk/Earnings%20Insight/EarningsInsight_112224.pdf. Accessed Dec. 1, 2024.

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